lOMoARcPSD|11291044 Summary-of-IB - Lecture notes 1-4 International Business (Western Sydney University) StuDocu is not sponsored or endorsed by any college or university Downloaded by Thao Phuong (phuongthaoo8902@gmail.com) lOMoARcPSD|11291044 Chapter 1: Globalization Definition Globalization is the shift toward a more integrated and interdependent world economy The world is moving away from self-contained national economies toward an interdependent, integrated global economic system Globalization of Markets There is the “global market”  falling trade barriers make it easier to sell globally  consumers’ tastes and preferences are converging on some global norm  firms promote the trend by offering the same basic products worldwide Globalization of Production Firms source goods and services from locations around the globe to capitalize on national differences in the cost and quality of factors of production like land, labor, energy, and capital Companies can  lower their overall cost structure  improve the quality or functionality of their product offering Global institutions Global institutions help manage, regulate, and police the global marketplace and promote the establishment of multinational treaties to govern the global business system The World Trade Organization (like its predecessor GATT)  polices the world trading system  makes sure that nation-states adhere to the rules laid down in trade treaties  promotes lower barriers to trade and investment  159 members in 2013 The International Monetary Fund (1944)  maintains order in the international monetary system  lender of last resort for countries in crisis  Argentina, Indonesia, Mexico, Russia, South Korea, Thailand, Turkey, Ireland, and Greece The World Bank (1944)  promotes economic development via low interest loans for infrastructure projects The United Nations (1945)  maintains international peace and security  develops friendly relations among nations  cooperates in solving international problems and in promoting respect for human rights  is a center for harmonizing the actions of nations The G20  forum through which major nations tried to launch a coordinated policy response to the 2008-2009 global financial crisis Downloaded by Thao Phuong (phuongthaoo8902@gmail.com) lOMoARcPSD|11291044  What Does Globalization Mean For Firms? Lower barriers to trade and investment mean firms can  view the world, rather than a single country, as their market  base production in the optimal location for that activity But, firms may also find their home markets under attack by foreign firms Technological change means  lower transportation costs  help create global markets and allow firms to disperse production to economical, geographically separate locations  low cost information processing and communication  firms can create and manage globally dispersed production  low cost global communications networks  help create an electronic global marketplace  global communication networks and global media  create a worldwide culture and a global consumer product market Multinational enterprise (MNE) - any business that has productive activities in two or more countries  Since the 1960s  the number of non-U.S multinationals has risen  the number of minimultinationals has risen Chapter 2: International Business Political Political economy of a nation - how the political, economic, and legal systems of a country are interdependent  they interact and influence each other  they affect the level of economic well-being in the nation Political system - the system of government in a nation Assessed according to  the degree to which the country emphasizes collectivism as opposed to individualism  the degree to which the country is democratic or totalitarian In the early 20th century, socialism split into Communism – socialism can only be achieved through violent revolution and totalitarian dictatorship in retreat worldwide by mid-1990s Social democrats – socialism is achieved through democratic means  retreating as many countries move toward free market economies  state-owned enterprises have been privatized Economic System Downloaded by Thao Phuong (phuongthaoo8902@gmail.com) lOMoARcPSD|11291044 There are three types of economic systems Market economies - all productive activities are privately owned and production is determined by the interaction of supply and demand  government encourages free and fair competition between private producers Command economies - government plans the goods and services that a country produces, the quantity that is produced, and the prices as which they are sold  all businesses are state-owned, and governments allocate resources for “the good of society”  because there is little incentive to control costs and be efficient, command economies tend to stagnate Mixed economies - certain sectors of the economy are left to private ownership and free market mechanisms while other sectors have significant state ownership and government planning  governments tend to own firms that are considered important to national security Legal System Legal system - the rules that regulate behavior along with the processes by which the laws are enforced and through which redress for grievances is obtained  the system in a country is influenced by the prevailing political system Legal systems are important for business because they  define how business transactions are executed  identify the rights and obligations of parties involved in business transactions There are three types of legal systems Common law - based on tradition, precedent, and custom Civic law - based on detailed set of laws organized into codes Theocratic law - law is based on religious teachings How Are Contracts Enforced In Different Legal Systems? Contract - document that specifies the conditions under which an exchange is to occur and details the rights and obligations of the parties involved Contract law is the body of law that governs contract enforcement  under a common law system, contracts tend to be very detailed with all contingencies spelled out  under a civil law system, contracts tend to be much shorter and less specific because many issues are already covered in the civil code Chapter 4: Differences in Culture Downloaded by Thao Phuong (phuongthaoo8902@gmail.com) lOMoARcPSD|11291044 Culture - a system of values and norms that are shared among a group of people and that when taken together constitute a design for living where  values are abstract ideas about what a group believes to be good, right, and desirable  norms are the social rules and guidelines that prescribe appropriate behavior in particular situations What Are Values And Norms? Values provide the context within which a society’s norms are established and justified and form the bedrock of a culture Norms include  folkways - the routine conventions of everyday life  mores - norms that are seen as central to the functioning of a society and to its social life Social Structure Social structure - a society’s basic social organization Consider  the degree to which the basic unit of social organization is the individual, as opposed to the group  the degree to which a society is stratified into classes or castes Social Stratification Social mobility - the extent to which individuals can move out of the strata into which they are born  Caste system - closed system of stratification in which social position is determined by the family into which a person is born  change is usually not possible during an individual's lifetime  Class system - form of open social stratification  position a person has by birth can be changed through achievement or luck The significance attached to social strata in business contacts  Class consciousness - a condition where people tend to perceive themselves in terms of their class background, and this shapes their relationships with others  An antagonistic relationship between management and labor raises the cost of production in countries with significant class differences Religion Religion is a system of shared beliefs and rituals that are concerned with the realm of the sacred Four religions dominate society Christianity Islam Hinduism Downloaded by Thao Phuong (phuongthaoo8902@gmail.com) lOMoARcPSD|11291044 Buddhism Confucianism is also important in influencing behavior and culture in many parts of Asia Ethical systems - a set of moral principles, or values, that are used to guide and shape behavior  Religion and ethics are often closely intertwined Language Language - the spoken and unspoken (nonverbal communication such as facial expressions, personal space, and hand gestures ) means of communication  Countries with more than one language often have more than one culture  Canada, Belgium, Spain Language is one of the defining characteristics of culture     Chinese is the mother tongue of the largest number of people English is the most widely spoken language in the world English is also becoming the language of international business but, knowledge of the local language is still beneficial, and in some cases, critical for business success  failing to understand the nonverbal cues of another culture can lead to communication failure Education Formal education is the medium through which individuals learn many of the language, conceptual, and mathematical skills that are indispensable in a modern society  Important in determining a nation’s competitive advantage  Japan’s postwar success can be linked to its excellent education system  General education levels can be a good index for the kinds of products that might sell in a country  Example: impact of literacy rates Hofstede’s dimensions of culture: Power distance - how a society deals with the fact that people are unequal in physical and intellectual capabilities Uncertainty avoidance - the relationship between the individual and his or her fellows Individualism versus collectivism - the extent to which different cultures socialize their members into accepting ambiguous situations and tolerating ambiguity Masculinity versus femininity - the relationship between gender and work roles Hofstede’s work has been criticized for several reasons Downloaded by Thao Phuong (phuongthaoo8902@gmail.com) lOMoARcPSD|11291044  made the assumption there is a one-to-one relationship between culture and the nationstate  study may have been culturally bound  used IBM as sole source of information  culture is not static – it evolves But, it is a starting point for understanding how cultures differ, and the implications of those differences for managers Culture evolves over time  changes in value systems can be slow and painful for a society Social turmoil - an inevitable outcome of cultural change  as countries become economically stronger, cultural change is particularly common  economic progress encourages a shift from collectivism to individualism  Globalization also brings cultural change Chapter 5: Ethics, Corporate Social Responsibility, and Sustainability Ethics Ethics - accepted principles of right or wrong that govern  the conduct of a person  the members of a profession  the actions of an organization Business ethics - accepted principles of right or wrong governing the conduct of business people Ethical strategy - a strategy, or course of action, that does not violate these accepted principles The most common ethical issues in business involve employment practices human rights environmental pollution corruption moral obligations of multinational companies How Are Ethics Relevant To Employment Practices? Firms should  establish minimal acceptable standards that safeguard the basic rights and dignity of employees  audit foreign subsidiaries and subcontractors regularly to ensure they are meeting the standards  take corrective action as necessary Downloaded by Thao Phuong (phuongthaoo8902@gmail.com) lOMoARcPSD|11291044 How Are Ethics Relevant To Human Rights? Basic human rights are taken for granted in developed countries     freedom of association freedom of speech freedom of assembly freedom of movement How Are Ethics Relevant To Environmental Pollution? Some parts of the environment are a public good that no one owns, but anyone can despoil The tragedy of the commons occurs when a resource held in common by all, but owned by no one, is overused by individuals, resulting in its degradation Ethical Dilemmas Ethical dilemmas - situations in which none of the available alternatives seems ethically acceptable  real-world decisions are complex, difficult to frame, and involve consequences that are difficult to quantify  the ethical obligations of an MNE toward employment conditions, human rights, corruption, environmental pollution, and the use of power are not always clear cut  the right course of action is not always clear Why Do Managers Behave Unethically? Several factors contribute to unethical behavior including Personal ethics - the generally accepted principles of right and wrong governing the conduct of individuals  expatriates may face pressure to violate their personal ethics because they are away from their ordinary social context and supporting culture  managers fail to question whether a decision or action is ethical, and instead rely on economic analysis when making decisions Decision-making processes - the values and norms that are shared among employees of an organization  organization culture that does not emphasize business culture encourages unethical behavior Organization culture - organization culture can legitimize unethical behavior or reinforce the need for ethical behavior Unrealistic performance expectations - encourage managers to cut corners or act in an unethical manner Downloaded by Thao Phuong (phuongthaoo8902@gmail.com) lOMoARcPSD|11291044 Leadership - helps establish the culture of an organization, and set the examples that others follow  when leaders act unethically, subordinates may act unethically, too Societal culture – firms headquartered in cultures where individualism and uncertainty avoidance are strong are more likely to stress ethical behavior than firms headquartered in cultures where masculinity and power distance rank high Chapter 6: International Trade Theory Free trade - a situation where a government does not attempt to influence through quotas or duties what its citizens can buy from another country or what they can produce and sell to another country Trade theory shows why it is beneficial for a country to engage in international trade even for products it is able to produce for itself Mercantilism Mercantilism (mid-16th century) suggests that it is in a country’s best interest to maintain a trade surplus—to export more than it imports  Advocates government intervention to achieve a surplus in the balance of trade  Mercantilism views trade as a zero-sum game—one in which a gain by one country results in a loss by another Absolute advantage Adam Smith (1776) argued that a country has an absolute advantage in the production of a product when it is more efficient than any other country in producing it  Countries should specialize in the production of goods for which they have an absolute advantage and then trade these goods for goods produced by other countries Comparative advantage The theory of comparative advantage (1817)- countries should specialize in the production of those goods they produce most efficiently and buy goods that they produce less efficiently from other countries  Even if this means buying goods from other countries that they could produce more efficiently at home Heckscher-Ohlin Theory Eli Heckscher (1919) and Bertil Ohlin (1933) - comparative advantage arises from differences in national factor endowments  the extent to which a country is endowed with resources like land, labor, and capital The more abundant a factor, the lower its cost Downloaded by Thao Phuong (phuongthaoo8902@gmail.com) lOMoARcPSD|11291044 The pattern of trade is determined by factor endowments  Heckscher and Ohlin predict that countries will  export goods that make intensive use of locally abundant factors  import goods that make intensive use of factors that are locally scarce Product Life-Cycle The product life-cycle theory - as products mature both the location of sales and the optimal production location will change affecting the flow and direction of trade According to the product life-cycle theory  The size and wealth of the U.S market gave U.S firms a strong incentive to develop new products  Initially, the product would be produced and sold in the U.S  As demand grew in other developed countries, U.S firms would begin to export  Demand for the new product would grow in other advanced countries over time making it worthwhile for foreign producers to begin producing for their home markets  U.S firms might set up production facilities in advanced countries with growing demand, limiting exports from the U.S  As the market in the U.S and other advanced nations matured, the product would become more standardized, and price would be the main competitive weapon  Producers based in advanced countries where labor costs were lower than the United States might now be able to export to the United States  If cost pressures were intense, developing countries would acquire a production advantage over advanced countries  Production became concentrated in lower-cost foreign locations, and the U.S became an importer of the product New Trade Theory New trade theory suggests that the ability of firms to gain economies of scale (unit cost reductions associated with a large scale of output) can have important implications for international trade Countries may specialize in the production and export of particular products because in certain industries, the world market can only support a limited number of firms Porter’s Diamond Of Competitive Advantage Identified four attributes that promote or impede the creation of competitive advantage Factor endowments - a nation’s position in factors of production necessary to compete in a given industry  can lead to competitive advantage  can be either basic (natural resources, climate, location) or advanced (skilled labor, infrastructure, technological know-how) Downloaded by Thao Phuong (phuongthaoo8902@gmail.com) lOMoARcPSD|11291044 Demand conditions - the nature of home demand for the industry’s product or service  influences the development of capabilities  sophisticated and demanding customers pressure firms to be competitive Relating and supporting industries - the presence or absence of supplier industries and related industries that are internationally competitive  can spill over and contribute to other industries  successful industries tend to be grouped in clusters in countries Firm strategy, structure, and rivalry - the conditions governing how companies are created, organized, and managed, and the nature of domestic rivalry  different management ideologies affect the development of national competitive advantage  vigorous domestic rivalry creates pressures to innovate, to improve quality, to reduce costs, and to invest in upgrading advanced features Chapter 7: Government Policy and International Trade Governments use various methods to intervene in markets including Tariffs - taxes levied on imports that effectively raise the cost of imported products relative to domestic products  Specific tariffs - levied as a fixed charge for each unit of a good imported  Ad valorem tariffs - levied as a proportion of the value of the imported good Tariffs  increase government revenues  force consumers to pay more for certain imports  are pro-producer and anti-consumer  reduce the overall efficiency of the world economy Subsidies - government payments to domestic producers  Subsidies help domestic producers  compete against low-cost foreign imports  gain export markets  Consumers typically absorb the costs of subsidies Import Quotas - restrict the quantity of some good that may be imported into a country  Tariff rate quotas - a hybrid of a quota and a tariff where a lower tariff is applied to imports within the quota than to those over the quota  A quota rent - the extra profit that producers make when supply is artificially limited by an import quota Voluntary Export Restraints - quotas on trade imposed by the exporting country, typically at the request of the importing country’s government  Import quotas and voluntary export restraints  benefit domestic producers  raise the prices of imported goods Downloaded by Thao Phuong (phuongthaoo8902@gmail.com) lOMoARcPSD|11291044 Local Content Requirements - demand that some specific fraction of a good be produced domestically  benefit domestic producers  consumers face higher prices Administrative Policies - bureaucratic rules designed to make it difficult for imports to enter a country  polices hurt consumers by limiting choice Antidumping Policies–also called countervailing duties–punish foreign firms that engage in dumping and protect domestic producers from “unfair” foreign competition Dumping - selling goods in a foreign market below their costs of production, or selling goods in a foreign market below their “fair” market value  enables firms to unload excess production in foreign markets  may be predatory behavior - producers use profits from their home markets to subsidize prices in a foreign market to drive competitors out of that market, and then later raise prices There are two main arguments for government intervention in the market Political arguments - concerned with protecting the interests of certain groups within a nation (normally producers), often at the expense of other groups (normally consumers) Economic arguments - concerned with boosting the overall wealth of a nation - benefits both producers and consumers What Are The Political Arguments For Government Intervention? Protecting jobs - the most common political reason for trade restrictions  results from political pressures by unions or industries that are "threatened" by more efficient foreign producers and have more political clout than consumers Protecting industries deemed important for national security - industries are often protected because they are deemed important for national security  aerospace or semiconductors Retaliation for unfair foreign competition - when governments take, or threaten to take, specific actions, other countries may remove trade barriers  if threatened governments not back down, tensions can escalate and new trade barriers may be enacted  risky strategy Protecting consumers from “dangerous” products - limit “unsafe” products Furthering the goals of foreign policy - preferential trade terms can be granted to countries that a government wants to build strong relations with  trade policy can also be used to punish rogue states Protecting the human rights of individuals in exporting countries - through trade policy actions Downloaded by Thao Phuong (phuongthaoo8902@gmail.com) lOMoARcPSD|11291044 Protecting the environment - international trade is associated with a decline in environmental quality  concern over global warming  enforcement of environmental regulations Chapter 8: Foreign Direct Investment What Is FDI? Foreign direct investment (FDI) occurs when a firm invests directly in new facilities to produce and/or market in a foreign country  the firm becomes a multinational enterprise FDI can be in the form of  greenfield investments - the establishment of a wholly new operation in a foreign country  acquisitions or mergers with existing firms in the foreign country The flow of FDI - the amount of FDI undertaken over a given time period  Outflows of FDI are the flows of FDI out of a country  are the flows of FDI into a country The stock of FDI - the total accumulated value of foreign-owned assets at a given time Gross fixed capital formation - the total amount of capital invested in factories, stores, office buildings, and the like  the greater the capital investment in an economy, the more favorable its future prospects are likely to be So, FDI is an important source of capital investment and a determinant of the future growth rate of an economy Why Choose FDI? Exporting - producing goods at home and then shipping them to the receiving country for sale  exports can be limited by transportation costs and trade barriers  FDI may be a response to actual or threatened trade barriers such as import tariffs or quotas Licensing - granting a foreign entity the right to produce and sell the firm’s product in return for a royalty fee on every unit that the foreign entity sells  Internalization theory (aka market imperfections theory) - compared to FDI licensing is less attractive  firm could give away valuable technological know-how to a potential foreign competitor  does not give a firm the control over manufacturing, marketing, and strategy in the foreign country  the firm’s competitive advantage may be based on its management, marketing, and manufacturing capabilities What Is The Pattern Of FDI? Knickerbocker - FDI flows are a reflection of strategic rivalry between firms in the global marketplace  multipoint competition - when two or more enterprises encounter each other in different regional markets, national markets, or industries Dunning’s eclectic paradigm - it is important to consider Downloaded by Thao Phuong (phuongthaoo8902@gmail.com) lOMoARcPSD|11291044  Location-specific advantages - that arise from using resource endowments or assets that are tied to a particular location and that a firm finds valuable to combine with its own unique assets  Externalities - knowledge spillovers that occur when companies in the same industry locate in the same area How Does FDI Benefit The Host Country? There are four main benefits of inward FDI for a host country Resource transfer effects - FDI brings capital, technology, and management resources Employment effects - FDI can bring jobs Balance of payments effects - FDI can help a country to achieve a current account surplus Effects on competition and economic growth - greenfield investments increase the level of competition in a market, driving down prices and improving the welfare of consumers  can lead to increased productivity growth, product and process innovation, and greater economic growth How Does FDI Benefit The Home Country? The benefits of FDI for the home country include The effect on the capital account of the home country’s balance of payments from the inward flow of foreign earnings The employment effects that arise from outward FDI The gains from learning valuable skills from foreign markets that can subsequently be transferred back to the home country How Does Government Influence FDI? Governments can encourage outward FDI  government-backed insurance programs to cover major types of foreign investment risk Governments can restrict outward FDI  limit capital outflows, manipulate tax rules, or outright prohibit FDI Governments can encourage inward FDI  offer incentives to foreign firms to invest in their countries  gain from the resource-transfer and employment effects of FDI, and capture FDI away from other potential host countries Governments can restrict inward FDI  use ownership restraints and performance requirements Downloaded by Thao Phuong (phuongthaoo8902@gmail.com) ... code Chapter 4: Differences in Culture Downloaded by Thao Phuong (phuongthaoo8902@gmail.com) lOMoARcPSD |11 2 910 44 Culture - a system of values and norms that are shared among a group of people and... lOMoARcPSD |11 2 910 44 How Are Ethics Relevant To Human Rights? Basic human rights are taken for granted in developed countries     freedom of association freedom of speech freedom of assembly... (phuongthaoo8902@gmail.com) lOMoARcPSD |11 2 910 44 Buddhism Confucianism is also important in influencing behavior and culture in many parts of Asia Ethical systems - a set of moral principles, or values,