The International Business Environment

Lisa Smirnova

Lisa Consulting

The International Business Environment

Recent political and economic changes affecting International Business

  • Europe
  • China
  • Russia
  • East and Central Europe

Political Environment

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

Political Environment

CHINA:

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

Political Environment

Russia:

  • 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

Technological Environment

  • 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

Telecommunications

As a result of the wireless telephone service, growth in this technology has been rapid

future growth:

  • 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

United States:

  • 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

Canada:

  • largest U.S. trading partner
  • Similarities (geography, language, and culture) helps to promote trade between the two countries

Mexico

  • Mexico is increasing exports to other countries outside North America, especially South America

South America

  • these countries have reduced their debt and are attracting international business
  • inter-country trade is growing

Europe:

  • 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

Russia:

  • economic reforms
  • Dismantling of price controls
  • Privatization (converting communist-style public enterprises to private ownership)

ASIA

  • 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

Deregulation

  • Removal of legal restrictions to free markets.

Privatization

  • 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.
  • Also:
  • 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

Modern Motivations

  • 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.

Employment Effects

Brings jobs that otherwise would not be created.

  • Direct: Hiring host-country citizens.
  • Indirect:
  • Jobs created by local suppliers.
  • Jobs created by increased spending by employees of the multi-national enterprise.
  • Questions remain on whether net jobs gained.

Balance-of-Payments Effects

  • 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

Host Country Problems With FDI

Important Institutions

GATT

World Bank

IMF

EBRD

OECD

General Agreement on Tariffs and Trade (GATT)

The Triad

United States (N. America)

Japan (SE Asia)

EU

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

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

EC Objectives

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. . .

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

Top Five Trading Partners of the United States

Rank Importing Country U.S. Exports(in millions ofdollars) Exporting Country U.S. Imports(in millions ofdollars)
1 Canada 132,584 Canada 159,746
2 Japan 67,536 Japan 117,963
3 Mexico 56,761 Mexico 74,111
4 United Kingdom 30,916 China 74,111
5 Germany 23,474 Germany 39,989

Mercosur

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 a very controversial issue among the members.

Association of Southeast Asian Nations

Asia Pacific Economic Cooperation

Founded in 1989 to ‘promote open trade and practical economic cooperation’. ‘Promote a sense of community’.

18 members

GDP: $13 trillion (1995)

50% of total world income

40% of global trade

Major Trends in International Trade

The Impact of Trade Policies

Ghana

The Impact of Trade Policies

Korea

An Overview of Trade Theory

Theory of Comparative Advantage

David Ricardo: Principles of Political Economy (1817).

Porter’s Diamond (Harvard Business School)

Factor Endowments from Heckscher-Olin

Basic factors:

Advanced factors:

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

Demand Conditions

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 Nations Source: World Economic Forum, 1998

1996 Rank124158917675
Country 1998 Rank 1997 Rank
Singapore 1 1
Hong Kong 2 2
United States 3 3
United Kingdom 4 7
Canada 5 4
Taiwan 6 8
Netherlands 7 12
Switzerland 8 7
Norway 9 10
Luxembourg 10 11

The Nature of Risk