The International Business Environment
The International Business Environment
- The growth of FDI and international trade
- The Triad and its implications
- Development of economic groups and legislative issues
Recent political and economic changes affecting International Business
- East and Central Europe
- Political situation continues to change making it difficult to firmly establish a foothold of power
- No longer a series of fragmented countries, but a giant, interwoven region
- International management must be aware of political happenings throughout the entire continent
Complex and risky
Since 1992, the GDP has been continually declining
steps to open up the economy:
- privatizing state enterprises
- expanding the size of capital markets
- Accelerating worker retraining
- creating new social services
- Reducing tariffs
- many MNCs are reluctant to do business there
- Companies refuse to pay taxes
- Price of oil has declined sharply
- barter has become a way of life
- High unemployment
Examples of Legal and Regulatory Issues
- Foreign Corrupt Practices Act - made it Illegal to influence foreign officials through personal payment or political contributions
- Bureaucratization - Competitive regulations to reduce the ability of foreigners to do business locally
- Privatization - Government deregulation and “free market”
Some Legal Issues
- Copyright infringements, particularly in Se Asia and Russia.
- Problems of legislative differences and the rate of change
- Implications of International Law
- Harmonization of Mercantile Law
- Internet Access allows people to obtain information from millions of sources
- Satellites will make it possible for everyone to send and receive voice, data, and digitized images through hand-held telephones
- Automatic translation telephones will allow people to communicate in their own language to anyone in the world who has access to a telephone
As a result of the wireless telephone service, growth in this technology has been rapid
- Many countries believe that without an efficient telephone system, their economic growth will stagnate
- Governments are accepting the fact that attracting foreign investment and know-how in telecommunications means giving up control to private industry
The Employment Fallout from Technology
how will technology affect the nature and number of employees?
- technology has the potential to largely displace employees in all industries
- Emerging information technology also makes work more portable
Common Country Classifications
- Developed Countries
- Developing Countries
- Less-developed Countries
- Transitional Economies
Economic Status & Issues of Major world Regions
- world leader in the computer and high-tech area of telecommunications markets
- Consumer-goods companies are seizing overseas market opportunities
- foreign MNCs are finding the U.S. to be a lucrative market for expansion
- largest U.S. trading partner
- Similarities (geography, language, and culture) helps to promote trade between the two countries
- Mexico is increasing exports to other countries outside North America, especially South America
- these countries have reduced their debt and are attracting international business
- inter-country trade is growing
- Privatization of nationalized industries
- Emergence of the EU as an operational economic union
- elimination of all trade barriers among member countries
- creation of a single currency and a regional central bank
- By using acquisitions and alliances, foreign MNCs have gained a foothold in the EU
- economic reforms
- Dismantling of price controls
- Privatization (converting communist-style public enterprises to private ownership)
- Japan continues to be the primary economic force
- China is quickly becoming the biggest economy in the world
- the Southeast Asian countries have recently been major export-driven economies
- ASEAN (Association of Southeast Asian Nations) promotes exports to other countries
The Nature of Economic Transformation
- Removal of legal restrictions to free markets.
- Transfer of state ownership of property into private hands.
- Creation of legal systems to protect property rights
What is FDI?
- A company buying a firm in a different country.
- A firm creating a ‘greenfield’ operation in a different country
- A firm creating a subsidiary in a different country.
- The firm has significant control of its foreign operation.
- Firm can affect managerial decisions of the foreign operation.
Traditional Motivations for Foreign Direct Investment
- secure key supplies
- enter rapidly growing or emergent markets
- access to low cost factors of production
- reduce costs
- extend product life cycles
- shortened product life cycle
enter economic groupings
- protect domestic and foreign markets
- increasing scale economies
- escalating R&D costs
Benefits of FDI to Host Countries
- Resource-transfer effects.
- Employment effect.
- Balance-of-payments effect.
- Economic growth.
Brings jobs that otherwise would not be created.
- Direct: Hiring host-country citizens.
- Jobs created by local suppliers.
- Jobs created by increased spending by employees of the multi-national enterprise.
- Questions remain on whether net jobs gained.
- Host country benefits from initial capital inflow when MNE establishes business.
- Host country records current account debit on repatriated earnings of MNE.
- Host country benefits if FDI substitutes for imports of goods and services.
- Host country benefits when MNE uses its foreign subsidiary to export to other countries.
General Home Country FDI Benefits
- Improves balance of payments for inward flow of foreign earnings.
- Creates a demand for exports.
- Export demand can create jobs.
- Increased knowledge from operating in a foreign environment.
- enefits the consumer through lower prices.
- Frees up employees and resources for higher value activities.
Host Country Problems With FDI
- Drives out local competitors.
- Can prevent the development of ‘local’ competitors.
- Profits brought home ‘hurts’ (debit) a host’s capital account.
- Parts imported for assembly hurt trade balance.
- Can affect sovereignty and national defense.
General Agreement on Tariffs and Trade (GATT)
- reduces or completely eliminates tariffs
- has been replaced by the World Trade Organization (WTO)
- has more power to enforce rulings on trade disputes and to monitor trade policies
United States (N. America)
Japan (SE Asia)
Implications of the Triad
Dominates the world economy (Ohmae 1987)
Role of the Japanese
Effect on LDCs and developing countries
Advantages of a company becoming a ‘Triad Power’, Ohmae
- Constant interaction with the world’s most important markets
- Increases the possibility of developing a universal product acceptable through the Triad
- The capacity to penetrate new markets within the Triad quickly
- The potential to respond quickly to competitors’ threatening behavior
Different types of Economic Blocs
Free Trade Areas - free or preferential trade, no coordinated tariff policy.
Customs Unions: Similar to FTAs but with coordinated tariffs.
Common Markets: Similar to CUs but with free movement of factors.
Economic Unions: Similar to CMs but with coordinated internal economic policies.
Economic Case for Regional Integration
Stimulates economic growth in countries
Countries specialize in those goods and services efficiently produced.
Additional gains from free trade beyond international agreements such as GATT and WTO.
Political Case for Economic Integration
Economic interdependence creates incentives for political cooperation and reduces potential for violent confrontation.
Together, the countries have the economic clout to enhance trade with other countries or trading blocs.
European Union (EU)
Consists of 15 western European nations
Trade barriers between EU members have been removed
a unified currency called the “euro” has been adopted
The European Community
“War is the usual condition of Europe, and a 30 year’s supply of the causes of war is always to hand.”Pyotr Kropotkin, 1884
- To Create a Major Political and Economic Entity
- Geopolitical Polarization between USSR and USA
- Europeans not entirely comfortable in either camp
- Perceived Global Economic Hegemony of USA
- Europeans still smarting from loss of colonies
- Fears of being rendered inconsequential
- Preservation of Internal Security
Provide for free internal flow of production factors
Will Europe Remain a Community?
There is no suggestion that the internal bonds of the EC are weakening. . .quite the contrary!
The EC can claim the most powerful economy in the world:
In 1992 the EC had. . .
- World’s largest GDP and exports (ahead of US)
- 3rd Largest population (after China and India)
- The pattern of membership remains unclear, as do the prospects forcontinued growth.
Examples of Trade Blocs: NAFTA
Created in 1993, a Free Trade Area made up of of Canada, the United States and Mexico.
Regional Developments Impacting Internationalization
North American Free Trade Agreement (NAFTA) - U.S., Canada, Mexico
- Removed all barriers to trade between countries
- created a huge North American market
- Agreement will expand to include Latin American countries, Chile, Argentina, and Brazil
Top Five Trading Partners of the United States
||U.S. Exports(in millions ofdollars)
||U.S. Imports(in millions ofdollars)
Examples of Trade Blocs: ASEAN
A Free Trade Area, originally dominated by Singapore but with influence shifting to Malaysia and Indonesia.
Japan’s influence is avery controversialissue among the members.
Association of Southeast Asian Nations
- Created in 1967
- 400 million citizens
- Economic, political and social cooperation
- Brunei, Indonesia, Malaysia, the Philippines, Singapore, Thailand and Vietnam.
Asia Pacific Economic Cooperation
Founded in 1989 to ‘promote open trade and practical economic cooperation’. ‘Promote a sense of community’.
GDP: $13 trillion (1995)
50% of total world income
40% of global trade
Major Trends in International Trade
- Liberalization of trade policies
- Easier communication
- Cheaper transportation
The Impact of Trade Policies
- GNP/per capita
- GNP Growth/year
- Shift from productive uses (cocoa) to unproductive uses (subsistence agriculture).
The Impact of Trade Policies
- GNP/per capita
- GNP/per capita
- GNP Growth/year
- Shift from non-comparative advantage uses (agriculture) to productive uses (labor-intensive manufacturing).
An Overview of Trade Theory
- Free Trade occurs when 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.
- The Benefits of Trade allow a country to specialize in the manufacture and export of products that can be produced most efficiently in that country.
- The Pattern of International Trade displays patterns that are easy to understand (Saudi Arabia/oil or Mexico/labor intensive goods). Others are not so easy to understand (Japan and cars).
Theory of Comparative Advantage
David Ricardo: Principles of Political Economy (1817).
- Extends free trade argument
- Efficiency of resource utilization leads to more productivity.
- Should import even if country is more efficient in the product’s production than country from which it is buying.
- Look to see how much more efficient. If only comparatively efficient, than import.
- Makes better use of resources
- Trade is a positive-sum game.
Porter’s Diamond (Harvard Business School)
- The Competitive Advantage of Nations.
- Looked at 100 industries in 10 nations.
- Thought existing theories didn’t go far enough.
- Question: “Why does a nation achieve international success in a particular industry?”
Factor Endowments from Heckscher-Olin
- natural resources,
- skilled labor,
Advanced Factor Endowments
More likely to lead to competitive advantage.
Are the result of investment by people, companies, government.
Relationship of Basic to Advanced Factors
- Basic can provide an initial advantage.
- Must be supported by advanced factors to maintain success.No basics, then must invest in advanced factors.
- Demand creates the capabilities.
- Look for sophisticated and demanding consumers.
- impacts quality and lifestyle
Related and Supporting Industries
Creates clusters of supporting industries that are internationally competitive.
Must also meet requirements of other parts of the Diamond.
Firm Strategy, Structure and Rivalry
Management ‘ideology’ can either help or hurt you.
Presence of domestic rivalry improves a company’s competitiveness.
Determinants of National Competitive Advantage
The Top 10 Most Competitive NationsSource: World Economic Forum, 1998
||1997 Rank1996 Rank
The Nature of Risk
- Political Risk
Likelihood that political forces will cause drastic changes that adversely affect profits and other goals.
- Economic Risk
Likelihood that economic mismanagement will cause drastic changes that adversely affect profits and other goals.
- Legal Risk
Likelihood that a trading partner will opportunistically break a contract or expropriate property rights.