Chapter 1 – The Rapid Change of International Business Firms that have substantial operations in more than one country: -global company (GC) : an organisation that attempts to t o standardize operations and integrate operations worldwide in most or all functional areas domesti c company company (M DC) - mul ti domes : an organisation that multicountry affiliates, each of which formulates its own business strategy based on perceived market differences tern ational compa company ny (I C)/ multin ational ente enterpr rpr ise (M NE )/ multi national company company - in tern : a global or multidomestic company (MNC) Globalization forces: Five kind of drivers, all based on change, that are leading international
firms to the globalization of their operation (+ examples): – preferential trading agreements, progressive reduction of trade barriers, 1. political – foreign investments by most governments, privatization of much of the industry in formerly communist nations and the opening of their th eir economies – advances 2. technological – advances in i n communication technology, global communication networks, internet and network computing – global firms become global customers 3. market – – globalization of product lines and production helps reduce costs by 4. cost – b y achieving economies of scale – firms are defending their home markets from foreign competitors by 5. competitive entering the foreign competitors market to distract them why international business differs from domestic business?! - it involves three environments: - domestic - foreign - international - the kinds of forces are the same but their t heir values often differ and changes in the values of foreign forces are at time more difficult so assess tern ational envir envir onment onment - in tern : (Def.) - interactions between the domestic environmental forces and the foreign environmental forces AND - interactions between the foreign environmental forces of two countries when an affiliate in one country does business with customers in another - see: International business model The forces:
- environment : all the forces surrounding and influencing life and development of the firm; they can be external or internal - uncontr oll able (exte : external forces over which management has no direct (extern rn al) for ces ces conrol, although it can exert an influence - competitive : kinds and numbers of competitors, their location, their activities - distributive : national and international agencies available for distributing goods and services : variables (such as GNP, unit labor cost,..) that influence a firm’s ability to - economic do business - socioeconomic : characteristics and distribution of human population - financial : variables such as interest rates, inflation rates and taxation - legal : the many foreign and domestic laws governing how international firms must operate
- physical : elements of nature such as topography, climate and natural resources - political : elements of nations’ political climates such as nationalism, forms of government, and international organizations - sociocultural : elements of culture (such as attitudes, beliefs and opinions) important to international managers - labour : composition, skills and attitudes of labour - technological : the technical skills and equipment that affect how resources are converted to products - contr : internal forces that management administers to adapt to contr oll able (in ter ter nal) f orces orces changes in the uncontrollable forces - production: capital, raw material, people - activities of organization: personnel, finance, production, production, marketing) The three environments in which an international company operates: domesti c envir onment - domes : composed of all the uncontrollable forces originating in the home country that influence the firm’s life and development
- for eign environm ent : composed of all the t he uncontrollable forces originating outside the home country that influence the firm - the kinds of forces are the same as those in the domestic environment but their values often differ and changes in the values of foreign forces are at time more diff icult so assess tern ational envir envir onment onment - in tern : interaction between the domestic and foreign environment forces or between sets of foreign environment forces International Business Model: - the basis of the model is formed by the relationships of the forces in the three environments - the external or uncontrollable forces in both the domestic and the foreign environments surround the internal forces controlled by management - the domestic environment of the international firm’s home country is surrounded by as many sets of foreign environments as there are countries in which the company does business - solid lines connecting the internal forces at the home office to the inter nal forces in the foreign affiliates indicate the lines of control - the orange areas indicate the international environment in which personnel in the headquarters of the international firm work - light orange is the domestic environment - blue the foreign environment
Other key words: - in tern ational busin ess : business whose activities are carried out across national borders. This not only includes international trade and foreign manufacturing but also the growing service industry in areas such as transport, tourism, advertising, construction, mass communication,.. - for eign business : the operations of a company outside its home or domestic market; many refer to this as business conducted within a foreign country (sometimes used interchangeably with international business) - gloablization (economic) – the tendency toward an international integration of goods, technology, information, labour, and capital, or the process of making this integration happen - for eign dir ect investments (FDI) – direct investments in equipment, structures, and organizations in a foreign country at a level that is sufficient to obtain significant management control; does not include mere foreign investments in stock markets – transportation of any domestic good or service to a destination outside a country - exporting or region; the opposite of importing which is the transportation of any good or service into a country or region, from a foreign point of view
Chapter 2 – International Trade and Foreign Direct Investments Two topics directly related to exporting and production in foreign countries: 1. International trade which includes exports and imports 2. F oreign D ir ect I nvestment which international companies must make to establish and expand their overseas operations 3. not discussed: (( F oreign sourcing : the overseas procurement ( Besorgung) of raw materials, components, and products )) International Trade:
- volume of trade: - in goods and services measure in current dollars exceeded $11 trillion in 2004 - Merchandise exports, at $8.9 trillion, were about 4.5 times what they were in 1980 - service exports were only $2.1 trillion in 2004, but their rate of growth since 1980 has been faster than that of merchandise exports - direction of trade - developed countries tend to trade with developed countries, with such trade accounting for more than 70% of their total trade, and the account for a majority of the exports worldwide - more than half of the exports from developed countries also go to developed countries, though this proportion has been declining for the past 35 years - the results for services exports are similar in many ways with those found for merchandise exports - the rise of regional trade agreements, as well as other factors, is transforming the volume and direction of world trade in merchandise and services - over 70% of world trade now occurs between members of regional trade agreements - major trading partners - number of advantages to focusing attention on a nation that is already a sizeable purchaser of goods coming from the would- be exporter’s country: - business climate in the importing country is relatively favourable - export and import regulations are insurmountable - there should be no st rong cultural objections to buying that nation’s product - satisfactory transportation facilities - import channel members (merchants, banks,..) are experienced in handling import shipments from the exporter’s area
- the government of a trading partner may be applying pressure on importers to buy from countries that are good customers for that nation’s exports Foreign investment Portf oli o i nvestment : the purchase of stocks and bonds to solely obtain a return on the funds
invested : the purchase of sufficient stocks in a firm to Di r ect in vestment
obtain significant management control in addition to receiving a return on their money - The size, growth and direction of foreign direct investment , worldwide and in the US - the book value (value of the total outstanding stock) of foreign direct investment was nearly $10 trillion at the end of 2004 - US is the largest of this FDI, with a total value of outstanding investments 1.46 times that of the UK, next largest investor, and 2.4 times that of Germany, the third-largest investor
- the proportion of global FDI accounted for by the US has been declining, falling from 36% in 1985 to 21% in 2004, while the proportion accounted for by the EU has risen to 53% - the proportion of FDI originating in the developing countries has also been increasing, reaching 11% in 2004 - on an annual basis, the US was the largest source of FDI flows in 2004, with $229 billion in outflows, over 350% of the level of the second-largest FDI source, the UK - overall, over 70% of annual FDI investments flow into developed countries, with a majority of this investment occurring in the form of acquisitions ( Übernahme) of existing companies - the leader in FDI inflows as a national level was China for each of the years 20012004, the first time an emerging market has held such a distinction as the target for worldwide FDI investments - the direction of FDI follows the direction of foreign trade; that is, developed nations invest in each other - due to the new business environment, many international firms are dispersing the activities of their manufacturing systems to locations closer to available resources - deciding where to locate may be either an FDI or trade decision US:
- FDI in the US rose from $185 billion in 1985 to $1,874 billion in 2005 - firms from just eight nations – UK, Japan, G, NL, F, Canada, Switzerland, Lux.- own about 85% percent of the total stock of FDI in the US
Reasons for entering the foreign markets (exporting to and manufacturing in)
- increase sales and profits - managers find that markets with a rising GDP per capita and population growth appear to be viable candidates for their operations AND - that the economies of some nations where they are not doing business are growing at a considerably faster rate - protect markets, sales and profits !!The globalization of an international firm occurs over at least seven dimensions and a company can be partially global in some dimensions and completely global in others !! - Seven dimensions along which management can globalize (standardize): 1. 2. 3. 4. 5. 6. 7.
product markets promotion wher e valu e is added to the product competi ti ve str ategy use of non -home-coun tr y per sonn el extent of global owner shi p in the fir m
- the possibilities range from zero standardization (multidomestic) to standardization along all seven dimensions (completely global!) Other key words: : a government-designated zone in which workers are permitted to Ex port processin g zone import parts and materials without paying import duties, as long as these items are then exported once they have been processed or assembled I n-bond plants (maqui ladoras) : Production facilities in Mexico that temporarily import raw material, components, or parts duty-free to be manufactured, processed or assembled with less expensive local labour, after which the finished product is exported
Chapter 3 – Theories of International Trade and Investment International Trade Theory :
Theories that attempt to explain why certain goods are traded internationally : an economic philosophy based on the belief that (1) a nation’s wealth - Mercantilism depends on accumulated treasures, usually gold, and (2) to increase wealth, government policies should promote exports and discourage imports - Th eory of A bsolu te Advantage : theory that a nation has absolute advantage when it can produce a larger amount of a good or service for the same amount of inputs as can another country or when it can produce the same amount of a good or service using fewer inputs than could another country - Th eory of Compar ative Advantage : Theory that a nation having absolute disadvantages in the production of two goods with respect to another nation has a comparative or relative advantage in the production of the good in which its absolute disadvantage is less - H eckscher- Ohl in Theor y of F actor E ndowment : theory that countries export products requiring large amounts of their abundant ( überflüssig) production factors and import products requiring large amounts of their scarce production factors : state that because customers’ tastes are strongly - L in der Theory of Overl appin g Demands affected by income levels, a nation’s income level per capita determines the types of goods they will demand; the kinds of goods produced to meet this demand reflect the country’s
income per capita level. International trade will be greater between nations with similar levels of per capita income. - I ntern ational Pr oduction L if e Cir cle (I PLC) Theory : states that many products first produced in the US or other developed countries are eventually produced in less developed nations and become imports to the very countries in which their production began - Krugman : Economies of scale and imperfect competition explain high levels of intraindustry trade. Economies of scale and the experience curve can permit a nation’s industries to become low-cost producers without requiring that the nation have an abundance of a certain class of production factors - F ir st-M over Theory : firms that enter the market first will be able to gain large market share, permitting them to obtain the benefits of reduced costs and improved technical expertise early; this can discourage foreign entrants that might have to enter at higher costs - M arshall and Porter / N ational Competiti ve Advantage fr om Regional Clu sters : nations achieve competitive advantage through the emergence of regional clusters; four classes of variables that will have an impact on the ability of the local firms in a country to utilize the country’s resources to gain a competitive advantage ( Porter’s Di amond Model ): demand conditions, factor conditions, related and supporting industries, and firm strategy, structure and rivalry Summary:
- international trade occurs because of relative price differences among nations - these differences stem from differences in production costs which result from - differences in the endowment of the factors of production - differences in the levels of technology that determines the factor intensities used - differences in the efficiencies with which these factor intensities are utilized - foreign exchange rates Trade restrictions
(Wrong?!) Arguments for imposing trade restrictions:
- demand of protection for defence industries so that the country will have these industries’ out-put in wartime and will not depend on import - new industries in developing countries frequently request barriers to imports of competing products from developed countries - protectionist argue that lower hourly labour rates can flood the nation with low priced goods and take away domestic jobs - “fair” competition, that is, an import duty to raise the cost of the imported good to the price of the imported article to eliminate any “unfair” advantage that foreign
competitors may have - companies will demand that their government retaliates against dumping and subsidies offered by their competitors in other countries - dumping : selling a product abroad for less than the cost of the production, the price in the home market, or the price to third countries - subsidies : financial contributions, provided directly or indirectly by a government, which confer a benefit; include grants, preferential tax treatment, and government assumption of normal business expenses - countervaili ng duties : additional import taxes levied on imports that have benefited from export subsidies Two basic kinds of import restrictions: - Tari ff (import duties): Taxes on imported goods for the purpose of raising their price
to reduce competition for local producers or stimulate local production - ad valor em : an import duty levied as a percentage of the invoice value (Rechnungsbetrag) of imported goods - specific : fixed sum levied on a physical unit of an imported good - compound : combination of ad valorem and specific duties - official price - variable levy: an import duty set at the difference between world market prices and local government-supported prices - lower duty for more local input : all forms of discrimination against imports other that - Nontarif f tr ade barr iers import duties - quantitative - quotas: numerical limits placed on specific classes of imports - voluntary export restraints (VERs): export quotas imposed by the exporting nation - orderl y marketing arr angements : formal agreements between exporting and importing countries that stipulate the import and export quotas each nation will have for a good - nonquantitative nontari ff barr iers - direct government participation in trade (subsidies, government procurement policies) - customs and other administrative procedures - standards (health, safety,..) International Investment Theories
- monopoli sti c advantage theory : theory that FDI is made by firms in oligopolistic industries possessing technical and other advantages over indigenous firms
- product and factor mar ket i mperf ections : these imperfections provide firms, primarily in oligopolistic industries, with advantages (knowledge permitting these firms to produce differentiated, preferred products) not open to indigenous companies - fi nancial factors : companies in nations with over-valued currencies are attracted to invest in countries whose currencies are undervalued OR international operations allow for a diversification of risks and therefore tend to maximize the expected return on investment - in tern ational product li fe cycle : natural stage to avoid losing a market - fol low th e leader : when one firm, especially the leader in the oligopolistic industry, entered the market, other firms in the industry follow; defensive because competitors invest to avoid losing the markets - cross i nvestment : FDI by oligopolistic firms in each other’s home countries as a defense measure - in tern ationali zation theory : an extension of the market imperfection theory: the concept to obtain a higher return on its investments, a firm will transfer its superior knowledge to a foreign subsidiary rather than sell it in the open market - dynami c capabili ty : for a firm to successfully invest overseas, it must have not only ownership of unique knowledge or resources but the ability to dynamically create and exploit these capabilities over time - Dunning’s eclectic theory of international production: for a firm to invest overseas, it must have three kinds of advantages: ownership-specific, internalization, and location-specific
Chapter 4 – International Institutions from an International Business Persepctive Influence of the mainly political international institutions on international business and their relevance to international business :
- int. org. such as the UN, military alliances, and ASEAN can have profound influence on international business - by providing a forum for governments to talk to each other, they contribute towards peace and stability, conditions that stimulate international business - such dialogue also results in collaborative effort that support multilateral cooperation in areas of immediate concern to business, such as maritime agreements, communication accords, and other rules and standards - many of these institutions support development projects, which stimulate business directly, through their contracts, and also through their support of the development of markets The United Nations:
- five main bodies or organs: - General Assembly: forum where every nation has one vote - Security Council: focuses on peace and security; main policy-setting body of the UN and has 5 permanent members (China, F, UK, US, Russia) and 10 elected members - Economic and Social Council: addresses issues related to trade, education, health and other economic and social issues - International court of Justice: hears cases between nations - Secretariat: headed by the Secretary-general, is the administrative arm of the UN - the UN has a variety of agencies that work throughout the world to promote peace and stability and to facilitate trade and economic activity - some general ways in which the UN plays a significant role: - provides “soft infrastructure” for the global economy by setting technical standards and norms - prepares the ground for investment in emerging economies - addresses the downside of globalization - seeks solutions to global environmental problems - addresses health and education issues that require global-level solutions - builds the cornerstone for an independent world: trust and shared values North Atlantic Treaty Organization (NATO): - security alliance of 26 North American and European nations - an armed attack against one member should be considered as an attack against all of them - partnership agreement with Russia Collective security Treaty Organization (CSTO): security alliance of six members of the Commonwealth of Independent States (former Union of Soviet Socialist Republics) Association of Southeast Asian Nations (ASEAN): ten-member body formed to promote peacse and cooperation in the Southeast Asian region The World Trade Organization and its predecessor GATT:
- WTO attempts to remove trade barriers worldwide - five basic principles: 1. trade will be without discrimination 2. trade should be freer; with trade barriers negotiated downward 3. trade should be predictable
4. trade should be more competitive 5. trade should be more beneficial for less developed countries, encouraging development and economical reform - its membership is composed of the major trading countries in the world, so it has the potential to significantly influence world trade - the WTO routinely issues decisions on trade disputes between countries - GATT (1947-1995), greatly contributed to the growth of the trade through trade liberalization - most favoured nation (MFN) clause: agreement that GATT member-nations would treat all members equally in trade matters Organisation for Economic Cooperation and Development (OECD) :
- group of developed countries dedicated to promoting economic expansion in its membernations - OECD conducts extensive research on a wide variety of national business and economic subjects - it produces highly regarded individual country surveys - these resource materials are valuable to researchers and businesspeople as they develop an understanding of markets OPEC (Organization of Petroleum Exporting Countries) :
- the major purpose is to allow developing nations to increase their price control over their oil they are selling on international markets - OPEC has had periods of marked effectiveness - today, despite unrest in Middle East and the ability of OPEC to influence oil prices in the short term, the number of non-OPEC nations that produce or soon will be producing oil has increased significantly - adding to the OPEC dilemma is the possibility that price gouging will lead to the development of fuel alternatives and increased conservation and, eventually, to a reduction in demand - admittedly, the popularity of SUVs in the US market suggests that the price of oil would have to escalate considerably to trigger this possibility The Group of Eight (G8): - group of government leaders from industrialized nations that meet regularly to discuss issues of concern - Canada, US, UK, France, Germany, Japan, Italy, Russia Economic integration agreements and the effectiveness of the major ones:
- four major forms of economic integration: - free trade area (tariffs abolished among members) - customs union (a free trade agreement plus a common external tariff) - common market (customs union plus mobility of services, people, and capital) - complete economic integration (common market plus a common currency) - NAFTA has been quite effective while Mercosur, whose goal is a common market, has faced difficulties recently, as has the Andean Community - the EU has been markedly successful Nord Atlantic Free Trade Agreement (NAFTA) and its impact:
- NAFTA was ratified by Canada, Mexico and the US - its purpose is to facilitate trade among the three countries
- NAFTA lowers tariffs on goods moving from one NAFTA country to another and makes it easier for businesses to sell goods and operate in other NAFTA countries European Free Trade Area: - four-nation non-EU FTA in Europe: Iceland, Lichtenstein, Norway and Switzerland - concentrate more on goods rather than services and labour African Trade Agreement: - to promote economic growth throughout the continent, African countries have formed regional trade groups - most African countries, though, have their main trade relationships with developed countries Mercosur (Mercosul): economic free trade area in South America modeled on the EU Central American Free Trade agreement: FTA amongst the US and several Central American nations Andean Community (CAN): South American five-nation trading bloc Asia-specific Economic Cooperation (APEC): regional vehicle for promoting open trade and practical economic cooperation; decision are nonbinding and reached by consensus Impact of the EU and its future challenges: -…
Chapter 5 – Understanding the International Monetary System Functioning of the gold standar d : - each country sets a certain number of units of its currency per ounce of gold, and t he ratio of their gold equivalence would establish the exchange rate between any two currencies - currencies were pegged to gold I M F (International Monetary Fund):
- established at Bretton Woods Conference - basic idea is that a workable international monetary system is in the interest of all nations - its Articles of Agreement outline the purpose of the fund in six points: - to promote international monetary cooperation - to facilitate the expansion and balanced growth of international trade - to promote exchange stability and orderly exchange arrangements among members - to assist in the establishment of a multilateral system of payments - to make the fund’s resources available for balance-of-payments corrections - to shorten the duration and lessen the disequilibrium of members’ balance of payments Br etton W oods System :
- the gold exchange standard established after WW II worked until the 1970s - it collapsed due to inflation and the surplus of US dollars held outside the US - until then, the Bretton Woods system provided monetary stability that supported the growth of international trade World Bank :
- lends money for development projects in middle-income and creditworthy poor countries - provides low-interest loans and grants for projects designed to help countries develop infrastructure, health and education, and other areas connected to development Bank f or I ntern ational Settlements :
- operates as a central bankers’ bank - serves as a forum for central bankers’ discussions, leading to international monetary cooperation - a centre for research - an agent or trustee for governments in various international financial arrangements F loati ng exchan ge r ate system :
- three basic arrangements: - a fr ee (clean) fl oat : market demand and supply regulate the exchange rate; closest to perfect competition; no government intervention - a managed (dir ty) fl oat : governments may intervene in the currency market as the perceive their national interests to be served - a fixed peg : the value of a currency is set at a fixed rate to another currency - other modifications of these three: - having no currency and using that of another country - using different approaches to the peg, including operating it within a band or allowing it to crawl (currency is readjusted periodically at a fixed, preannounced rate or in response to changes in indicators) - having a currency board: legislated commitment to exchange domestic currency for a specific foreign currency at a fixed rate
- managing a floating exchange: a monetary authority actively intervenes on the exchange market without specifying or making public its goals and targets - independently floating exchange rates: relies on the market Common currency area for the Euro : - the Euro zone, established by the Maastricht Treaty, began trading only in euros in 2002 - there are presently 12 members in the euro zone, and many of the newly acceding countries want to join Bal ance of Payments (BOP) :
- record of a country’s transaction with the rest of the world - BOP data are of interest because - it reveals demand for the country’s currency - if a country is exporting more than it imports, there will be a high demand for the currency in other countries in order to pay for the exported goods - this demand may well create pressure on the exporter’s currency, in which case it might be expected to strengthen - its trend helps managers predict what sort of economic environment may develop in the country - this impacts their choice of strategic risks to take in specific countries - BOP accounts: - each international transaction is an exchange of assets with a debit and a credit side - payments to other countries, funds flowing out, are tracked as debits (-) - transactions that are payments from other countries, funds flowing in, are tracked as credits (+) - the BOP is presented as a double-entry accounting statement in which the total credits and debits are always equal - the statement of a country’s BOP is divided into several accounts and many subaccounts - the main accounts: - the curr ent accoun t , which tracks the net changes in exports and imports of goods (tangibles) and services (intangibles) - includes three subaccounts: - goods or m er chan dise account : record of tangible exports and imports, the balance of this account is called the tr ade balance - servi ces account : record of intangibles that are exchanged internationally - uni later al tr ansfers account: a transfer with no matched return flow, no reciprocity - the capital accoun t , which records the net changes in a nation’s international financial assets and liabilities - includes these three subaccounts: - direct investments: investments located in one country that are effectively controlled by residents of another country - portfolio investments: long-term investments that do not give the investors control over the investment - international movements of short-term capital: changes in international assets and liabilities with an original maturity of one year or less
, which deals with the government’s holdings of - the off i cial r eser ve accoun t foreign currency, gold, accounts in foreign banks, and, possibly, SDRs; a balance of the country’s foreign currency
- the BOP current and capital account add up to the total account, which, given the double-entry approach, is balanced - a deficit in the current account is always accompanied by an equal surplus in the capital account, and vice versa - a current account deficit is not, in itself, a sign of bad economic condition - what it means is that the country is importing capital - the deficit is a response to the conditions in the country - e.g. excessive inflation, low productivity or inadequate saving Special drawi ng r i ghts (SDRs) :
- were established by the IMF to replace the US dollar as the main reserve asset - have not yet done so; SDRs do not circulate; they are an accounting entry - unit of account for the IMF and other international org
Chapter 6 – Sociocultural Forces Culture: sum total of beliefs, rules, techniques, institutions, and artifacts that characterize human populations Ethnocentricity: belief in the superiority of one’s own ethnic group
Significance of culture for international business: - to be successful in their relationships overseas, international businesspeople must be students of culture; they must not only have factual knowledge, they must also become culturally sensitive - culture affects all functional areas of firms: marketing, human resource management, production and finance : Sociocul tur al components of cultur e - aesthetics (a culture’s sense of beauty and good taste) - attitudes and beliefs - religion (knowing the other religion contributes to understanding) - material culture - language (key to culture) - societal organization - education - legal characteristics - political structures Cultural aspects of technology:
- material culture, especially technology, is important to managements contemplating overseas investment - foreign governments have become increasingly involved in the sale and control of technical assistance - technology may enable a firm to enter a new market successfully even if its competitors are already established there - it often enables the firm to obtain superior conditions for an overseas investment because the host government wants the technology The pervasiveness (Verbreitung) of the information technology era : - businesspeople must keep abreast of the changes in information technology to avoid falling behind their competitors - the internet enables small firms to compete in the global market, a fact that provides new opportunities for some firms and new competition for others - businesspeople who can capture information from transaction data have a significant advantage over those who cannot - the opinion in the retailing industry is that this capability is the primary reason for Wal-Mart’s success, for example Un spoken lan guage :
- nonverbal communication, such as gestures and body language - because unspoken language can often tell businesspeople something that spoken language does not, they should know something about this form of cross-cultural communication Two classes of relationships within society:
- a knowledge of how a society is organized is useful because the arrangement of relationships within it defines and regulates the manner in which its members interface with one another - two classes of societal relationships: - those based on kinship ( Verwandtschaft) - those based on free association of individuals Hofstede’s four cultural value dimensions:
1. individualism vs collectivism 2. large vs small power distance 3. strong vs weak uncertainty avoidance 4. masculinity vs femininity - those dimensions help managers understand how cultural differences affect organizations and management methods
Chapter 7 – Natural Resources and Environmental Sustainability The role of location, topography, climate, and natural resources as factor conditions in Por ter’s diamond model: - factor condition s : attributes that a country inherits ( basic f actor s ), such as climate and natural resources, and those a country can mould ( advanced factor s ), such as the labour force and infrastructure - they are all inherited factors that underlie inputs that companies draw on - local disadvantages in factor conditions can be recognized as advantages and become a force for innovation - adverse conditions such as local terrain and climate and scarce raw materials, at the basic-factor level, or labour shortages, at the advanced-factor level, force firms to develop new methods, and this innovation often leads to a national comparative advantage - hence, understanding these factors is important Surface features contribute to economic, cultural, political and social differences among
nations and among regions of a single country: - mountains divide nations into smaller regional markets that often have distinct cultures, industries, and climates - sometimes even the languages are different - desert and tropical forests act as barriers to people, goods, and ideas The importance of inland waterways and outlets to the sea : - bodies of water attract people and facilitate transportation - water transportation has increased even after the building of railroads and highways - various European firms are shipping goods in barges on the Rhine waterway instead of using highways Climate exerts a broad influence on business: - the difference in climate conditions among a firm’s markets and manufacturing sites
can significantly affect its operations - in the case of the marketing mix, a product sold for use in northern Canada may need protection against cold weather, while the same product used in the tropics may require extra cooling to resist the heat - heavy seasonal rains or long, very cold or dry spells can require that the firm carry large inventories ( Bestände) because of the difficulty of replenishing ( nachfüllen) stock in inclement (rau) weather - other distribution challenges related to climate include protection from the cold, heat and humidity Options available for nonrenewable and renewable energy sources : - non-renewable energy sources include petroleum, both from conventional sources and nonconventional sources such as shale, oil sands, coal and natural gas - other non-renewable energy sources are coal, nuclear power, and natural gas - renewable sources include hydroelectric, wind, solar, geothermal, waves, tides, biomass, and ocean thermal energy conversion - each of these energy sources has a cost that impacts its use - as non-renewable sources approach depletion, renewable sources will become more widely applied as their relative cost decreases
Environmental sustainability and its characteristics:
- environmental sustainability rests on the commitment of business to operate without reducing the capacity of the environment to provide for future generations - there are three characteristics of evolving sustainable business practices that are widely agreed upon: - limits which apply to the ecological system - interdependence which applies to the social system as well as to the other two - equity in distribution which applies to the economic system The stakeholders theory as a framework for environmental sustainability: - stakeholder theory : an understanding of how business operates that takes into account all identifiable interest holders - stakeholders theory forces a business to address its underlying values and principles - it encourages managers to articulate clearly how the want to do business - what kind of relationships do they want and need to create with their stakeholders to deliver on their purpose?! - in this way, operating with stakeholders theory leads to a public discussion about responsibility of the business among all stakeholders
Chapter 8 – Economic and Socioeconomic Forces Purpose of economic analyses :
- to keep abreast of the latest economic developments and also to plan for the future, firms regularly assess and forecast economic conditions at the local, state, and national levels - when they enter international operations, the economic analysis increases in complexity because mangers are operating in two new environments: foreign and international - there are more economies to study and these economies are frequently highly divergent Different categories (based on levels of national economic development and the common
characteristics of developing nations): - mangers involves in international business encounter markets with far greater differences in levels of economic development than those in which they have been working in domestic business settings - a nation’s level of economic development affects all aspects of business, and we commonly group them into different categories based on their level of economic development, such as: - developed : a classification for all industrialized nations, which are the most technically developed - developing : classification for the world’s lower -income nations, which are les technically developed - newly in dustri ali zin g countr ies (NI Cs) : the four Asian tigers and the middleincome economies such as Brazil, Mexico, Malaysia, Chile, and Thailand - newly in dustri ali zed economies (N I Es) : the fast-growing upper-middleincome and high-income economies of South Korea, Taiwan, Hong Kong, and Signapore - developing nations have certain common characteristics, including unequal distribution of income, technological and regional dualism, a large percentage of the population in agriculture, high population growth, high illiteracy rate, insufficient education and low savings rates Gross national in come (GNI ) : the total value of all income generated by a nation’s residents
from international and domestic activities : measures income generated from domestic activity by Gr oss domesti c produ ct (GDP) residents of the country as well as nonresidents Economic and socioeconomic dimensions of the economy and different indicators used to
assess them: - various functional areas of a firm require data on the size and rates of changes of a number of economic and socioeconomic factors - in order to be a potential market, an area must have sufficient people with the means to buy a firm’s products
- the socioeconomic data provide information on the number of people, and the economic dimensions tell us if they have purchasing power - among the more important economic dimensions: - GD P - GN I (mostly preferred as a measure)
- GNI/Capita : to be able to compare purchasing power; most important is a high growth rate which indicates a fast-growing market - un der grou nd economy : the part of a nation’s income that, because of unreporting or underreporting, is not measured by official statistics - cur r ency conver si on is a problem with GNI estimates when they want to be compared - to overcome this deficiency a method of comparing GNIs based on purchasing power parity (PPP) has been developed : measure of how a nation’s income is apportioned - distri bution of income among its people, commonly reported as the percentage of income received by population quintiles - per sonal consumpti on expendi tur es : how consumers allocate their disposable income (after-tax personal income) between purchase of essential and nonessential goods - discretionar y i ncome : amount of income left after paying taxes and making essential purchases - PPP-based consumer expendit ur es : eliminate differences in relative prices; shows how the composition of consumption changes with the level of development - pr ivate i nvestments - un it l abour costs : total direct labour costs divided by units produced - financial data (such as exchange rates, inflation rates, interest rates, and the amount of a nation’s foreign debt): ch 11 - the principle socioeconomic dimensions: - total populati on r ates of gr owth - age distri buti on - populati on density: measure of the number of
inhabitants per area unit (inhabitants per square kilometre or square mile) - populati on distributi on: measure of how the inhabitants are distributed over a nation’s areas Importance of nation’s consumption patterns and the significance of purchasing power parity:
- marketers must know how consumers allocate their discretionary incomes, since this is money spent on their products - they must also use purchasing power parity (PPP) to understand what the true purchasing power of a nation is - consumers in a nation whose GNI appears to be too low to be a viable market may have some discretionary buying power when the GNI based on market exchange rates in converted to a GNI based on PPP H uman -needs approach :
- the new definition of economic development, which includes more than economic growth - it defines economic development as the reduction of poverty, unemployment, and inequality in the distribution of income Degree to which labour costs can vary from country to country: - hourly labour rates, especially when stated in US dollars, change rather rapidly - there are three factors that are responsible: 1. real changes in compensation
2. changes in productivity 3. change sin exchange rates Significance for businesspeople of the large foreign debts of some nations: - large foreign debts may indicate that the government will impose exchange controls on its country’s businesses - if a large part of a country’s export earnings go to service its external debt, there will
be little remaining for use by firms in the country to pay for imports of raw materials, components used in their products and production machinery - the government could impose price and wage controls - there is also the possibility that firms can buy some of the discounted debt to obtain local currency at a favourable exchange rate
Chapter 9 – Political Forces Ideological forces that affect business:
- include - capitalism : an economic system in which the means of production and distribution are for the most part privately owned and operated for private profit - communism : Marx’s theory of a classless society, developed by his successors into control of society by the communist Party and the attempted worldwide spread of communism - socialism: public, collective ownership of the basic means of production an distribution, operating for use rather than profit - terminology used to describe various political positions: - conservative : a person, group or party that wishes to minimize government activities and maximizes private ownership and business - ri ght wing : a more extreme conservative position - liberal : in the contemporary US, a person, group or party that urges greater government involvement in business and other aspects of human activities - left wing : a more extreme liberal position Although most governments own businesses, they are privatizing them in growing numbers: - why firms are nationalized: - to extract more money from the firm - the government suspects that the firms are concealing profits - profitability – the government believes it could run the firms more efficiently and make more money - ideology – governments sometimes nationalize industries - job preservation - the government has put money into a firm or industry and control usually follows money - happenstance ( Zufall) – e.g. German-owned firms after WW II - claimed advantages for government-owned companies: - they can cut prices unfairly because they do not have to make profits - they get cheaper financing - they get government contracts - get export assistance - can hold down wages with government assistance - direct subsidies - privatization : the transfer of public sector assets to the private sector, the transfer of management of state activities through contracts and leases, and the contracting out of activities previously conducted by the state - even governments that consider themselves capitalist and conservative own some businesses - but almost all governments – with the US lagging behind- are privatizing and getting out of business Changing sources and reasons for terrorism and the methods and growing power of terrorists: - terrorism : unlawful acts of violence committed for a wide variety of reasons, including for ransom, to overthrow a government, to gain release of imprisoned
colleagues, to exact revenge for real or imagined wrongs, and to punish nonbelievers of the terrorist’s religion
- the former Soviet Union and Easter Europe satellites no longer finance, train, and shelter terrorists, but they have been replaced by countries such as Iran and North Korea - radical Islamic fundamentalists represent a growing threat - they are infuriated by the peace moves between Israel and its Arab neighbours - nuclear terrorism is a new fear, as security has failed at nuclear sites in the former SU and enriched uranium is being stolen and smuggled around the world Steps that travelling international business executives should take to protect t hemselves from terrorists: - keeping travel plan confidential - keep the firm aware of where business travellers are (also in case of natural disasters) - use a travel management service The importance to business of government stability and policy continuity: - business can rarely thrive in a country with an unstable government or rapid, drastic policy changes - stability : characteristics of a government that maintains itself in power and whose fiscal, monetary, and political policies are predictable and not subject to sudden, radical changes - instability : characteristics of a government that cannot maintain itself in power or that makes sudden, unpredictable, or radical policy changes Explaining country risk assessment by international business: - Coun tr y ri sk assessment (CRA ): an evaluation, conducted by a bank or business having an asset in or payable from a foreign country or considering a loan or an investment there, that assesses the country’s economic situation and policies and its
politics to determine how much risk exists of losing the asset or not being paid - country risk assessment is now considered a necessity by most international businesses before they can commit people, or technology to a foreign country - CRA involves evaluating a country’s economic situation and policies as well as its politics
Chapter 10- Legal Forces Complexity of the legal forces that confront international business: - international business is affected by many thousands of laws and regulations issued by states, nations, and international organizations - some are at cross-purposes, and some diminish the ability of firms to compete wit foreign companies Public in tern ational law : legal relations between governments : laws governing actions of individuals and companies that cross Pri vate in tern ational l aw
international borders Treaties : agreements between countries, which may be bilateral or multilateral; also called conventions, covenants, compacts, or protocols The importance of foreign law: - miscellaneous laws in host countries can trip up foreign businesspeople or tourists - charges can range from not carrying an alien registration card to narcotics possession Contract devices and institutions that assist in interpreting or enforcing international contracts: - international contracts should specify which country’s law and courts apply when disputes arise - the UN’s CISG and the EU’s Rome Convention have established rules for solving contract disputes - arbitration : a process, agreed to by parties to a dispute in lieu of going to court, by which a neutral person or body makes a binding decision; is an increasingly popular solution The need and methods to protect in tell ectual proper ty : - patents, trademarks, trade names, copyrights, and trade secrets are r eferred to as intellectual properties - pirating of those properties is common and is expensive for their owners - the UN’s World Intellectual Property Organization (WIPO) was created to administer international property treaties, as was TRIPS, a WTO agency with a similar purpose : Nonr evenu e tax pu poses - certain taxes have purposes other than to raise revenue; for example, some aim to redistribute income, discourage consumption of certain products, encourage use of domestic goods, or discourage investment abroad - in addition, taxes differ from country to country - tax treaties, or conventions, between countries can affect decisions on investment and location Enforcement of antitrust (monopolfeindlich) laws: - the US and the EU enforce antitrust laws extraterritorially - this is a concern for companies operating in many countries because of the complexity of dealing with so many laws in different jurisdictions : a country’s attempt to apply its laws to foreigners or Extraterr itori al appli cation of laws
nonresidents and to acts and activities that take place outside its borders
The risk of product liability legal actions, which can result in imprisonment for employees or fines for them and the company: - product li abil ity: refers to the civil or criminal liability of the designer or manufacturer of a product for inquiry or damages it causes - in several ways, product liability is treated differently in the US legal system than it is in other countries - e.g. only in the US does one find lawyers’ contingency fees, jury trials of these cases, and punitive damages - also the principle of stri ct li abil ity has been adopted in Europe, defendants are permitted to use state-of-the-art defenses and countries can put a cap on damages - product liability is virtually unknown in Japan US laws that affect international business operations:
- many US laws affect international business operations, both of US and of foreign companies - the US applies federal employment laws to any US company operating anywhere - this extraterritoriality means that US companies operating in foreign countries are required to follow US employment law as applies to US nationals - the Foreign Corrupt Practices Act and the Sarbanes-Oxley Act also apply to US businesses in their foreign operations and to foreign businesses that conduct operations in the US
Chapter 11 – Financial Forces - Financial forces: - foreign currency exchange risks - national BOP - inflation - national monetary and fiscal policies - taxation - tariffs - debts : the price of one currency expressed in terms of another F oreign exchange quotations - mainly reported in the world’s currency exchange markets in terms of the US$ because - it is a main centr al r eserve asset of many countries: asset, usually currency, held by government’s central bank
- the most used vehi cle cur r ency : currency used as a vehicle for international trade or investment - and in terventi on curr ency : currency used by a country to intervene in the foreign currency exchange markets, often to buy (strengthen) its own currency How money can be made – and lost- in the foreign exchange (FX) markets: - foreign exchange (FX) markets are worldwide and collectively involve more money than any other market - on most days, you can trade money 24h somewhere in the world - as a result, there are ample opportunities for buying and selling foreign currency - making or losing money in these markets depends on exchange rate movements FX quotations, including cross rates :
- spot rate : the exchange rate between two currencies for delivery within two business days; is reported for all currencies - for ward curr ency mar ket : trading market for currency contracts between 30, 60, 90 or 180 days in the future; for the most heavily traded currencies, 30-, 60-, and 90-day rates are reported - forward rate : exchange rate between two currencies for delivery in the future, usually 30, 60, 90 or 180 days : situation in which a currency’s forward rate quotes stronger - tradin g at a premiu m than spot - tr adin g at a di scount : situation in which a currency’s forward rate quotes are weaker than spot - cross r ates : are exchange rates for trading directly between non-US$ currencies - how the foreign exchange market actually operates: - most transaction is done over the counter - prices consist of a bid price and an ask price, with the bid lower than the ask - bid-ask spread, difference between the two, provides a margin for the bank or agency - FX markets are large, liquid and competitive Causes of exchange rate fluctuation :
- basic supply and demand of the currency
- interest rates - inflation rates - expectations of the future - monetary and fiscal policies - world events Currency exchange control :
- many developing countries have instituted a system of currency exchange controls, which restrict the se of local and foreign currencies - developing countries often have far less hard (convertible) currency than they need - they therefore ratio the hard currency - anyone wanting hard currency may have to apply to the government agency, specifying how much is wanted and the use to which it will be put Financial forces (such as tariffs, taxes, inflation, and the balance of payments) affect international management:
- business managers must be prepared to react to financial forces that can affect their business - tariffs are an added cost that, because they are changing, are not always predictable - taxes also increase costs, but they tend to be more predictable in the short term - inflation may impact where capital is sourced as well as the cost of doing business - the balance of payments may impact the ability to move funds - in general, the effects of these forces tend to increase costs or constrain the movement of funds Exchange rate forecasting :
- eff ici ent mar ket approach : assumption that the current market prices fully reflect all available relevant information - r andom walk h ypothesis : assumption that the unpredictability of factors suggests that the best predictor of tomorrow’s prices is today’s prices
- fu ndamental approach : exchange rate prediction based on econometric models that attempt to capture the variables and their correct relationships - techni cal analysis : an approach that analyzes data for trends and then projects these trends forward
Chapter 12 – Labor Forces Forces beyond management control that affect the quantity and quality of labour in a
nation: - labour quantity and quality are forces beyond a company’s control - labour quality : the skills, education, and attitudes of available employees - labour quantity : the number of available employees with the skills required to meet an employer’s business needs
- a finite number of employees are available in any labour pool with the skills required to meet an employer’s needs
- populations are aging and are projected to decline in many developed countries in coming years - labour is shifting significantly from rural to urban locations, especially in developing nations - unemployment remains a problem in many regions and particularly among youths between the 15 and 24 - large numbers of immigrant labourers, often unskilled, are moving within and particularly between nations - although process is being made, an estimated one in seven children between the ages of 5 and 17 is a labourer and most of these children labourers are in the developing countries The reasons people leave their home country to work abroad: - in many parts of the world, wars, revolutions, racial and ethnic battles, and political repression cause people to flee - others go to other countries in hopes of better jobs and pay : the loss by a country of its most Brain drain
intelligent and best-educated people
Reasons that some countries have guest wor kers : - guest workers move to a host country to perform specific kinds of jobs, usually in service, factory or construction work - but when a country’s economy slows, its native workers may want the jobs held by guest workers - racial friction has developed in some countries because of guest workers Factors associated with employment policies , including social roles, gender, race and
minorities: - ICs typically must adjust labour practices to succeed in international markets, due to a range of factors influencing employment policies and practices - even where laws have changed to prohibit the practice, cultural, historical and other factors cause social status to be relevant consideration regarding employment practices - although women are making progress toward equality in many nations, sexism remains a problem throughout the world - women continue to have higher level of illiteracy and lower levels of wages than their male counterparts in virtually all regions of the world, and they are underrepresented in business and political positions of authority - racism also remains an issue worldwide Differences in labour un ions from country to country:
- historically, labour unions have tended to be more political in Europe and more pragmatic in the US - in response to globalization of businesses, many unions have begun to establish international collaboration in an effort to extend their influence
